Intuitive Surgical sees thinner profit margins in 2018, shares fall

(Reuters) - Intuitive Surgical Inc (ISRG.O) said on Thursday it would continue to spend heavily on research and development in 2018, seeking to fend off competition and maintain its dominance in the surgical robotic systems market.

Company executives also forecast profit margins for 2018 below 2017 levels on a call with analysts after Intuitive reported better-than-expected earnings for the fourth quarter.

Sunnyvale, California-based Intuitive’s shares, which hit a record high earlier in the day, fell 3 percent in after-hours trading.

Excluding a $318 million tax expense, Intuitive reported earnings of $2.54 per share. The result exceeded analysts’ average estimate by 30 cents, according to Thomson Reuters I/B/E/S.

But investors, who sent the company’s stock up 73 percent last year and 23 percent in 2018, may have been expecting a bigger earnings outperformance, said Brandon Henry, an analyst at RBC Capital Markets.

Intuitive has enjoyed a near monopoly in the market for robots used in abdominal surgery since launching its flagship device called da Vinci in 2000.

But the company has ramped up spending on product development in recent months to remain ahead of competition.

The FDA approved Transenterix Inc’s (TRXC.A) surgical robot for abdominal surgery in October. The news weighed on Intuitive’s stock price even though the device was not expected to compete directly with da Vinci.

Operating expenses this year will rise 16 to 18 percent above 2017 levels, as the company continues to invest in emerging markets and new technology including computer-assisted surgery, executives said. Analysts said the expense forecast was slightly higher than expected.

Intuitive expects a 2018 gross profit margin of 70 percent to 71.5 percent of revenue, lower than the 71.9 percent it recorded in 2017.

“They don’t have big deals on the horizon, and they should be investing internally,” said RBC’s Henry.